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Non-Toll Pricing—A Primer

Introduction to Non-Toll Pricing

Photo. Cars driving on a highway, approaching an overhead sign marking exit lanes and southbound lanes, both for carpools only.

Traffic congestion represents a significant and growing threat to mobility in the United States. According to the most recent data, the average driver traveling in the nation’s urbanized areas during peak periods experienced 38 hours of total delay in 2005 (up from 14 hours in 1982), at a total cost of $78 billion in excess travel time and wasted fuel consumption.

To some extent, these trends reflect the vibrancy of our nation’s cities, which have seen significant economic growth over the past 3 decades. They also reflect growing imbalances between travel growth and the development of new highway capacity, as the former has exceeded the latter for many years. However, in an important way, traffic congestion also results from the inefficient pricing of highway use, leading drivers to travel more than what is economically desirable, particularly during the height of morning and evening rush hours.

Congestion pricing is becoming increasingly viewed as an important strategy for improving the operational performance of the highway system by using price signals to more efficiently and effectively allocate scarce capacity on our nation’s highways. A key feature of this approach is providing more variability in the charges that road users face. When road users face flat fees (e.g., annual registration fees or insurance payments) or find those costs bundled with other services (e.g., free parking), the cost of additional use will be excessively low, contributing to overuse. Further refinements may lead to a system of charges that can vary by the time and location of travel.

A major reason why people drive so much is that alternative transportation can rarely match the speed and convenience of driving alone, and although the fixed costs of driving are quite high, the incremental costs of every mile of driving are relatively low. Even when gas prices spike, most of the costs of owning and operating a vehicle are still fixed. That is, once a person has chosen to acquire and insure a vehicle, which is the case for the vast majority of Americans, there is little financial incentive not to use it for most trips. By contrast, the per-trip price for transit is generally noticeably higher than is the incremental cost of driving.

In addition to most costs of car ownership being fixed, costs for car parking tend to be “bundled” with the purchase of other assets, goods, and services. Bundled parking costs means that although consumers are paying for parking, they are doing so only indirectly, and most importantly, they cannot reduce their parking costs by choosing to exercise more discretion in the frequency of their driving and parking. Thus, for example, customers of a store that provides free parking pay for the cost of the parking as part of their purchases, regardless of whether they park or take (and pay for) transit. Another example of bundled parking costs is when so-called free parking is included in the price to rent an apartment. A renter does not have the option to save on rent by foregoing car ownership and relying on alternative transportation, even though there is clearly a cost involved in providing the parking.

In exchange for reducing fixed driving costs and bundled parking costs, many drivers—especially lower income drivers—would readily accept new charges based on their mileage, such as for insurance, and direct parking charges that they control by their amount of driving and by where and how long they park. Motorists, of course, will only reduce their driving when the savings offered by pay-as-you-drive-and-you-save (PAYDAYS) pricing exceeds the value of a particular drive-alone trip.

Shifting away from fixed driving costs and hidden parking costs to mileage-based and variable-parking pricing would offer substantial environmental, safety, congestion reduction, and other public benefits. Economists do appreciate the benefits of varying driving costs based on mileage and of direct parking pricing, but they have tended to focus instead on promoting road tolling with rates that vary by congestion level. Usage-based vehicle charges and variable parking charges are possible, however, without having to overcome substantial political hurdles that are commonly encountered when roadway tolling is proposed. Yet as with toll pricing, vehicle-use pricing has been slow in coming.

In addition to inertia that supports pre-existing pricing customs, barriers to implementation include private sector start-up and marketing costs (e.g., PAYDAYS insurance), bundled office space and parking leases precluding immediate cost savings from pricing-related parking-demand reductions, and public sector costs associated with collecting vehicle taxes and fees in different ways (e.g., charging for each mile of road used instead of a fixed annual vehicle-registration fee). Nevertheless, there is noticeable movement toward the adoption of PAYDAYS and variable parking charges, and there is growing recognition that such pricing has great potential to be implemented widely, thus providing a host of significant benefits.